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LATIN AMERICA Discord is stacking the odds against competitive growth

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The Latin American steel industry's "red alert" on imports of Chinese steel, which grew 35.6 percent to 1.6 million tonnes in the first 10 months of 2007, begs several questions. The most pressing is why the region's steel industry, blessed with abundant local raw materials, is unable to compete effectively in its own backyard?

The region is less vulnerable to external economic shocks than in the past, due in most cases to reduced public debt levels and increased international reserves, according to Latin American economic thinktank Comisión Económica para América Latina y el Caribe. As such, one theory gaining ground is that the main threat to competitive growth doesn't come from the likes of China but from within the region itself.

Glaring disparities and even squabbles between the 23 Latin American nations are, we now hear, holding back the region's overall economic growth and investment levels. Despite the existence of regional trade groupings such as the Southern Cone Common Market (Mercosul) and the Andean Pact, the trend has been to seek national rather than regional solutions to regional problems such as cost increases and rising Chinese steel imports. The consequence of this is that while economic growth since 2003 has averaged 7.5 percent annually in emerging nations and 9 percent in Asia, Latin America is lagging behind at 5-percent growth despite its wealth of raw materials.

What has many potential external investors and bankers worried are the highly politicized currents now dividing Latin America. The military dictatorships that dominated the region from the 1960s to the 1980s have come full circle in some countries into a rash of populist and indigent movements, where a kind of socialist tyranny is playing havoc with the region's overall positive plod forward into democracy. This is particularly so in Bolivia, Ecuador and Venezuela.

Fears that the rules of the game might be fast changing have apparently scared off potential foreign investors in Venezuela's overdue steel capacity expansion program. The latest delays indicate that even Iran, touted as one of the new investment partners, might be getting cold feet. Techint Group, which recognizes the long-term potential and has already sunk a lot of capital into Venezuela, has decided to stick it out at steelmaker Siderúrgica del Orinoco CA despite price controls on both iron ore and steel, which now distort both domestic market supply and demand.

Brazil, which had been liberalizing its trade, also seems to be attempting an about-turn, with the Instituto Brasileiro de Siderúrgia, the nation's steel institute, lobbying for the restoration of steel import taxes on 15 common steel products following recent increases in imports. High local taxes and infrastructure costs mean growing production and investment costs for Brazilian steelmakers, particularly as the value of the real is one of the global currencies to have increased most against the U.S. dollar over the past two years.

In late 2007, the Petrobras Transporte SA transport arm of state oil producer Petróleo Brasileiro SA warned that it might buy 400,000 tonnes of steel plate from China or South Korea during the next four years because the Brazilian product is 40 percent more expensive. This is a fair example of the competitive pressures now facing Brazilian steel, despite the country being home to what are probably the world's finest and largest iron ore reserves.

Imports of Chinese steel products and manufactured steel-containing goods are now virtually holding the Chilean and Mexican steelmaking industries to ransom, with anti-dumping cases being prepared in these countries against flat-rolled products and tube imports, according to iron and steel trade group Instituto Latinoamericano del Fierro y del Acero.

The Latin American steel and mining industries could present a more competitive front if regional governments and corporations were to engage in more regional cooperation

- If the Bolivians supply Brazil with the natural gas they previously undertook to supply and stop harassing Brazilian-owned pig iron and iron ore mining operations, such as Eike Batista's EBX Group, on the border of the two countries.

- If the Venezuelan government stops criticizing Brazilian and Colombian political affairs and the Brazilians become less nervous about accepting Venezuela as a full member of Mercosul.

- If Mercosul members Argentina and Uruguay resume diplomatic relations and find a constructive solution to pollution on their border by Uruguayan pulp and paper plants.

- If Bolivia and Chile, both associate Mercosul members, find a solution to their 200-year-old conflict that saw Chile snatch away Bolivia's access to the Pacific Ocean.

- And if the regional common market groupings adopt similar currency and pricing policies.

A new brainchild designed to help ease these rifts—new regional development bank Banco do Sul—was formally created in December, albeit amid colorful differences of opinion. Brazilian President Luiz Inácio Lula da Silva and Venezuelan President Hugo Chavez still haven't agreed on whether the bank's funds should derive from countries' reserves or working budgets. Uruguay's President Tabaré Vazquez declined the invitation to the opening ceremony in Buenos Aires to avoid meeting Argentine President Cristina Kirchner. Nonetheless, the seeds for a new forum to fund regional development projects have been sown.

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